Melbourne's Housing Market: An Affordable Haven While Prices Soar Elsewhere

Soaring property prices have seen stories of a competitive housing market make headlines on a near-daily basis. But one city continues to attract attention as an outlier. Once the country's second-most expensive capital behind Sydney, Melbourne is now emerging as a case study for harnessing house price growth before it sped off at the pace of other capitals. Dwelling values in the city grew just 15.5 per cent over five years, according to data released earlier this month — a figure dwarfed by increases of nearly 80 or 90 per cent in Brisbane, Adelaide and Perth. At 0.7 per cent, December's overall national price growth was the smallest in several months, according to the same dataset, led by slight declines in Sydney and Melbourne dwelling values. But a gulf separates the two cities on other key measures. "The median house value in Melbourne is about $980,000. That's a little bit more than $600,000 lower than what you'll find in Sydney as a median." An investor exodus The slower-than-average growth has been linked to gentler rent increases, a surge in first home buyers and warnings that an investor exodus could destabilise the property market. Property analysts say a mix of economic conditions, policy settings and demographic shifts are at work. The city's property market also experienced a significant downturn in 2022, almost wiping out coronavirus-era increases. Toby Balazs from the state's peak real estate body, the Real Estate Institute of Victoria, described the city's slow price growth as "somewhat surprising" in the national context. But he said the state's broader economic environment — and greater capital growth elsewhere — was a key driver. Property investment groups began warning of a landlord exodus not long after more land taxes and a greater absentee owner surcharge were among the COVID debt relief measures unveiled in the state government's 2023 budget. Cotality estimates an investment property with a land value of $650,000 now shoulders an additional $1,300 in land tax annually. Landlords have also contended with tightening tenancy laws and interest rate rises, among other costs. "There is good growth opportunity in the Melbourne market," Mr Balazs said. "But the realities of holding a property — in both tax and regulation — versus other states does make it more challenging." Rental bonds data — a proxy for the number of rental properties in the market — has since lent empirical evidence to the theory that landlords are selling off their investment properties in large numbers. Those records suggest Victoria shed about 16,500 rental properties across the first year the changed tax settings were in effect. First home buyer activity grows Views on the flow-on effects of the changed market dynamics were somewhat mixed, with the Property Council warning they could ultimately disadvantage several stakeholders. "Our recent research into the impact of taxes on foreign investment shows that Victoria is turning away investors at an alarming rate," the council's Victorian director Cath Evans said. "Reduced investment means fewer new homes, tighter rental supply and higher rents. "Renters face less choice, first-home buyers see less affordable stock, and remaining investors have returns eroded by unpredictable charges." On the other hand, Cotality data shows that rent increases in Melbourne in 2025 (about 2.5 per cent over 2025) were less than those elsewhere (a national average of about 5.2 per cent, and as high as 7.6 per cent in Darwin). First home buyers moved in as investors exited, Mr Lawless said, with that cohort making up about 27 per cent of demand across Victoria in September. While Melbourne is below the national average on dwelling price growth, rental increases and dwelling price to income ratios, the city is above the national average when it comes to new loans taken out by first home buyers. "This is the flip side of Melbourne's soft housing value growth over the past five years or so," Mr Lawless said. Stable price growth welcomed Weak investor demand is not the only factor at work in Melbourne, according to Mr Lawless, who said a long period of negative interstate migration growth and above-average housing delivery over about 15 years had also cooled the market. Stubbornly high construction costs, especially for medium and high-density housing, could slow the housing delivery pipeline, reversing the trend. Interest rates are also widely tipped to hold or rise next month. "I think 2026 will probably be a softer year for housing markets around the country, Melbourne included," Mr Lawless said. Housing equity experts warn Melbourne's lower median dwelling value-to-income ratio — about 7.1 compared with 10 in Sydney — provides little to celebrate for low-income households. More detailed data shows dwelling prices have climbed in some pockets of Melbourne typically considered more affordable: about 14 per cent in Frankston year-on-year, and 9.5 per cent in Brimbank. "I think the flow-on effects are one, we see lower quality-of-life and people making sacrifices in lower-income areas," Katrina Raynor from think tank Per Capita's Centre for Equitable Housing said. "We also see longer commutes, because a lot of the places we want to see key workers, key workers can't afford to live. "You see changing transport patterns and people spending less time with their children and families because they're spending more time in cars." Changes in the property market tend to deliver winners and losers, she said, but stabilising house prices was a good policy outcome in the face of unsustainable growth. "From an equity perspective, house prices not increasing in Melbourne is a good thing for many people," she said.